Whether bonds or stocks are better in taxable depends on your current situation. At current yields, I only recommend bonds in taxable if you are in a high tax bracket and have a low-cost muni fund for your high-tax state, or if you are in the top tax bracket. In either case, you pay much higher taxes on stock dividends than other investors (18.8% plus state tax, or 23.8% even without state tax, on qualified dividends).I thought conventional wisdom is *not* to keep bonds in taxable because the interest gets eaten up by taxes, especially since most of the returns from bonds is from interests rather than price increase (aka stocks). Would you change your assessment if you're in the 35%+ bracket?Treasuries, including TIPS, are good choices for bonds in a taxable account. In addition to the state tax exemption, they are the least risky bonds, and thus have the lowest yields and the lowest federal tax costs. The tax costs of TIPS and nominal Treasuries should be about equal if inflation matches expectations.
(Munis are better in taxable in a high tax bracket, especially if there is a low-cost fund for your high-tax state. But even if there is no such fund, I would prefer out-of-state munis with state tax over Treasuries with 35.8% federal tax in the 32% bracket.)
But even if you prefer to hold bonds in tax-advantaged accounts, you may need to hold some in taxable because your tax-advantaged accounts are full of other tax-inefficient investments, or because your 401(k) has better stock than bond options. In that case, Treasuries (including TIPS) are the best bonds for a taxable account. For example, if you are in a moderate bracket and have to split bonds between taxable and tax-deferred, you could hold Treasuries in taxable and corporates in tax-deferred, for a lower tax cost than holding Total Bond Market in both.
Statistics: Posted by grabiner — Thu Aug 29, 2024 11:30 pm — Replies 7 — Views 1185